LatAm electric sector more attractive, but challenges linger

Thursday, December 7, 2017

Although economic recovery in Latin America has been slower than expected, the region is now seen as a more attractive investment destination than before the global slowdown. Nevertheless, challenges remain, according to a BNamericas Intelligence Series report.

The report, Electric Power Outlook 2018: Slow Recovery, Bright Future, finds that the region as it moves toward liberalization and market-based policies, improving the prospects of long-term stability and profitability, has become a more stable market, at least from a regulatory perspective.

Start your 15 day free trial now!


Already a subscriber? Please, login

However, the region's image has been tarnished by corruption scandals, such as that involving Brazilian conglomerate Odebrecht, and uncertainty is expected to increase with impending presidential elections in various countries. Moreover Mexico, a key market, is engaged in renegotiating Nafta, which could slow down north-south investment flows.

Also Read: Odebrecht's trail of bribes in LatAm

The report quotes Fitch Ratings as saying that "potential growth [in Latin America] has been adversely affected by lower investment rates and lagging productivity," while "negative spillovers from corruption cases in several countries and a heavy election calendar in 2017-18 could detract from reforms."

Moreover, while big strides have been taken in market liberalization, regulatory reform and the entry of investment to projects awarded through power auctions in Argentina, Chile and Mexico, the region's electricity sector has yet to consolidate, the report states.

Also Read: Chile, Mexico among 10 'most attractive' renewables markets

Next year could be viewed as a transition period, particularly in Mexico and Argentina, where the liberalization process is still unfolding, and investors will be paying close attention to whether projects awarded through the regulated market tenders in recent years are financed and installed according to schedule.

Auction results have been promising so far, with 66 contracts awarded to wind, solar, biomass, biogas, landfill biogas and small hydroelectric projects in Argentina's most recent auction in November, which generated record low prices. Similarly successful was Mexico's third auction, also held in November, which will result in the construction of 15 new renewable energy plants in eight states.

Chile's latest auction, putting 2,200GWh/y of power supply to tender, also saw prices pushed down to a record low of US$32.5/MWh.

However, many of the projects awarded in the three countries have yet to secure environmental permits and, crucially, financing, as ultra-low prices, though potentially economically attractive for long-term power purchases and beneficial for consumers, can make projects less attractive to investors.

Investment will also roll in for the massive expansion of transmission lines, given the increasingly diverse geographic distribution of wind and solar farms, the report states.

However, 2018 will also mark a key year in determining whether the liberalization trend can transcend changes in government, and whether new administrations can maintain investor confidence, particularly in nascent wholesale power markets such as Argentina and Mexico.